I am delighted to publish a 15-video series dedicated to my book, “Blockchain + Antitrust: The Decentralization formula”. You can access all the chapters over here, and all the video transcripts over here.
In previous videos, I have explained why blockchain and antitrust should be combined. I showed that it creates synergies and ends up beneficiating both. This is true despite all the tensions between blockchain and antitrust that I explored from the sixth to twelfth video of this series. In this video, I want to explain how to combine blockchain and antitrust from a very practical point of view. I want to detail how we can address the tensions while implementing a mutually benefiting cooperation. This idea is captured by the concept of “law + technology” instead of “law & technology” in which you simply use the law to address the issues created by the technology. Here, I want to explore how to combine law and technology to reach the objective of decentralization.
But first, I need to highlight the main challenges created by blockchain when enforcing the law, including antitrust. Only then will I be able to provide working solutions.
(1) The first challenge relates to the digital fortress blockchain is creating. Of course, enforcement is questioned every time a new fundamental technology appears. Some had predicted the death of antitrust law when the Internet appeared, and yet, antitrust is very much alive. But I believe things could be different with blockchain. Blockchain is a transactional technology built around two key features: encryption and immutability. One, blockchain uses encryption techniques that anonymize not only the identity of participants but also that of transactions. We covered together how much this complicates the work of antitrust agencies. Evidently, agencies will develop analytic tools to reveal real-life identities and detect patterns. They could also rely on private firms. But even if they succeed, blockchain architecture will greatly complicate enforcements. The absence of a single point of failure explains it.
Suppose one implements an anticompetitive smart contract on a blockchain with no kill-function or preprogrammed technical solutions. In that case, the blockchain will continue to perform the transactions for as long as the terms apply, and assets are made available. In fact, the same problem will be encountered with smart contracts that are not anti-competitive but help regular business activities. Code will self-execute and put parties in an uneasy situation if they wish to stop it.
(2) So, we need to find solutions for the law to be enforceable when necessary. This is where I introduce the magic four. I believe that four criteria should be taken into account when designing regulations that will impact blockchains: (1) manageability, (2) objectivity, (3) accuracy, and (4) flexibility (“MOAF”).
⇨ “manageability” refers to the costs of implementing and enforcing the regulation. Simple regulations drive enforcement costs down, but they may be easy to circumvent. On the contrary, complex regulations are costlier to enforce but harder to avoid.
⇨ “accuracy” refers to the idea that regulation should minimize false positives and false negatives.
⇨ “objectivity” implies that a regulation’s objectives should be transparent, known to all market players and that enforcement is consistent.
⇨ “flexibility” implies that regulation should achieve its goal in the least intrusive way possible to preserve heterogeneity and competition.
(3) Now, I am sorry to report that there are tradeoffs between these objectives. We can’t maximize them all at the same time. But of course, we may prefer specific balances between them, and it appears that certain regulators get to maximize more of these objectives.
To be concrete, on the one hand, there is a tradeoff for regulators between accuracy and manageability. The more accurate a regulation (i.e., it generates few false positives and false negatives), the costlier. Think about it this way: one could give a free pass to all forms of decentralized finance, or NFTs. This would be extremely easy to enforce, as the regulator won’t have anythingto do. But of course, this would create false negatives, allow scams and Ponzi schemes. The opposite is also true. If you prohibit all DeFi projects, you will create false positives and remove useful products from the market. On the other hand, there is another tradeoff between increasing objectivity and flexibility. The less a regulation is flexible, the more regulators and companies can apply it (or comply with it) in a consistent and certain way. But flexibility allows for innovation. In fact, coercing agents eliminates innovation, so, here again, we see a tradeoff between objectivity and flexibility.
With that in mind, I want to discuss very specific solutions to enable easier legal enforcement within blockchain ecosystems while preserving its viability and dynamism. This is where the “law + technology” approach really kicks in. As I will explain, if we only use the law to force legal enforcement, we won’t strike a convincing balance between the four criteria I just detailed. For example, suppose you want to address the legal issues created by immutability without using code. In that case, you can pass legislation imposing that all blockchains create a backdoor for regulators to intervene. But if you do so, all the benefits of immutability go away. And users will go away too. You can also… criminalize core developers’ activities and impose fines on them when a blockchain is used for illegal activities. The problem is that, as I explained in the seventh video, core developers cannot stop illegal uses, so… this does not work from a rule of law standpoint. Or you can prohibit blockchains, but again, you see how inefficient that is. Note that all these solutions are confrontational. They are not accurate, hard to manage, and often not flexible. This is not a pretty picture.
(4) So… let’s try to do things differently. Let’s try a law + technology approach. Let’s use code to achieve legal aims — here, the ability to enforce the law when necessary — while preserving technological dynamism and survival chances. This might ring the bell of the maxim “code is law” introduced by Lawrence Lessig. It encapsulates the idea that code is the language of technology and the defining constraints of behaviors within a digital ecosystem. This means that if we change code, we can change behaviors. This leads to “law is code” according to which the law should be transposed into code to influence behaviors.
But of course, the risk is that if you give regulators the power to change code the way they want, they may coerce users and blockchain participants too much. They may also capture blockchain, slow it down, and put it at risk. So… what I propose is to adopt a “law is code approach”, but ex-post. It means to change code to create a way to enforce the law, but only after an illegal behavior has been implemented, as opposed to trying to change the code to prevent all legal behaviors. More on that in the next video.
That is all for today. Thank you very much for listening. Take care of yourself, and, if you can, someone else too. Cheers.